Page | 0

s

BASEL III – PILLAR 3 ANNUAL DISCLOSURES

YEAR-2014

Page | 1

Table of contents

1 Scope of application .......................................................................................................................... 2 2 Capital structure ................................................................................................................................. 3 3 Capital adequacy .............................................................................................................................. 11 4 Credit risk . ....................................................................................................................................... 13 5 Standardized approach and supervisory risk weights ....................................................................... 19 6 Credit risk: Disclosures for portfolios subject to IRB approach ...................................................... 21 7 Credit risk mitigation ....................................................................................................................... 21 8 General disclosure for exposure related to counter-party credit risk ................................................ 22

9 Securitisation .................................................................................................................................... 22 10 Market Risk: Disclosure for banks using standardised approach ..................................................... 23 11 Market Risk: Disclosure for banks using internal models approach (IMA) for trading portfolios 23 12 Operational Risk .............................................................................................................................. 23 13 Equities: Disclosures for banking book positions ............................................................................ 24 14 Commission rate risk in the banking book ....................................................................................... 25

15 Abbreviations used………………………………………………………………………………… 26

List of tables

Table 2, (b) to (e) Capital structure ........................................................................................................... 5-10

Table 3, (b) Credit risk exposures and capital requirements ....................................................................... 12

Table 3, (d) Capital requirements for market risk ........................................................................................ 13

Table 3, (e) Capital requirements for operational risk .................................................................................. 13

Table 3, (f) Capital adequacy ratios ............................................................................................................. 13

Table 4, (b) Credit risk exposure . ................................................................................................................ 14

Table 4, (c) Credit risk exposure – by Geographic area ........................................................................... …15

Table 4, (d) Credit risk exposure – by Industry sector ................................................................................. 16

Table 4, (e) Credit risk exposure – by residual contractual maturity ........................................................... 17

Table 4, (f) Impaired Loans, Past due Loans and allowances ...................................................................... 18 Table 4, (g) Impaired Loans, Past due Loans and allowances – by Geographic area ................................... 18 Table 4, (h) Reconciliation of changes in the allowances for loan impairment ........................................... 19 Table 5, (b) Allocation of exposures to risk buckets .................................................................................... 21 Table 7, (b) & (c) Credit risk exposure covered by CRM ............................................................................ 22 Table 10, (b) Level of Market risk in terms of capital requirements ............................................................ 23 Table 13, (b) Value of Equity investments ................................................................................................. 24 Table 13, (c) Types and nature of equity investments . ................................................................................ 24 Table 13, (d) & (e) Gains/Losses etc., on equity investments ...................................................................... 24 Table 13, (f) Capital requirements on equity investments ............................................................................ 25 Table 14, (b) Interest rate risk in the banking book ...................................................................................... 25

Page | 2

1. Scope of Application

a) Scope

The Basel III disclosures contained herein relate to Saudi Hollandi Bank and its subsidiaries Saudi Hollandi

Capital, Saudi Hollandi Real Estate Company and Saudi Hollandi Insurance, hereinafter collectively referred to

as ‘the Group’, for the period ended December 31, 2014. These are compiled in accordance with ‘the Saudi

Arabian Monetary Agency (SAMA) regulations on Implementation of New Capital Adequacy Framework’.

Pillar 1 – Minimum capital requirements

Basel III requires risk-weighted assets (RWAs) to be calculated for credit, market and operational risk with

various approaches, with differing levels of sophistication available to banks..

Minimum capital requirements are calculated as 8% of RWAs.

The Group applies the standardized approach for calculating RWAs for credit, market and operational risk.

The capital charge for market risk is based on a “building-block” approach. The capital charge for each risk

category is determined separately. Within the commission rate and equity position risk categories, separate

capital charges for specific risk and the general market risk arising from debt and equity positions are

calculated.

The Group’s operational risk capital charge is calculated by segregating the Group’s activities in to business

lines and applying a factor (denoted beta) to the average income that was achieved in the previous three years

by that business line.

Pillar 2 – Supervisory review process

Pillar 2 of the Basel and SAMA regulations requires banks to undertake a comprehensive assessment of their

risks and to determine the appropriate amounts of capital to be held against these risks where other suitable

mitigants are not available. This risk and capital assessment is commonly referred to as the Internal Capital

Adequacy Assessment Process (ICAAP). The range of risks that are covered by the ICAAP is much broader

than Pillar 1, which covers only credit, market and operational risk. Additional risks such as interest rate risk

in the banking book, liquidity risk, concentration risk, strategic risk, macroeconomic and business cycle risk

and reputational risk, are covered under Pillar 2.

The Group has developed an ICAAP framework which closely integrates the risk and capital assessment

processes, and ensures that adequate levels of capital are maintained to support the Group under stressed

conditions.

The Board has formed a Board Risk Committee to assist and advise it in discharging its responsibilities. At a

management level, the Group has established a number of committees to oversee the various risks it is exposed

to:

The Board has vested in the Asset and Liability Committee responsibility for the establishment of policies

relating to the management of balance sheet and market risks and ensuring compliance with those policies.

The Board has delegated approval limits for credit risk to the Head Office Credit Committee (HOCC).

An Operational Risk Management (ORM) unit operates within the risk function and is responsible for

identifying, assessing, monitoring and controlling/mitigating operational risk throughout the Bank in

conjunction with all business units. Its activities are overseen and supported by the Operational Risk

Management Committee.

Page | 3

The ICAAP framework has been designed to be applied consistently across the organisation to meet the Pillar

2 requirements of the regulator.

The ICAAP is documented and submitted to SAMA. This is followed by in-depth discussions between the

Group and SAMA on the appropriate capital levels (this second stage is called the Supervisory Review and

Evaluation Process or SREP).

Pillar 3 – Market discipline

Pillar 3 aims to provide a consistent and comprehensive disclosure framework that enhances comparability

between banks and further promotes improvements in risk practices. The information provided here has been

reviewed and validated by senior management and is in accordance with the rules in force at the time of

publication, covering both the qualitative and quantitative items.

In accordance with SAMA regulation, the Group publishes the Pillar 3 disclosures on capital structure and

capital adequacy ratios on a quarterly basis, Pillar 3 quantitative disclosures on a semi-annual basis and both

qualitative & quantitative disclosures on an annual basis in its website www.shb.com.sa as soon as is practical

after the Group announces its annual results.

b) Basis of consolidation

The consolidated financial statements are prepared in accordance with Accounting Standards for Financial

Institutions promulgated by SAMA and International Financial Reporting Standards as issued by the

International Accounting Standards Board. The Group prepares its consolidated financial statements to comply

with the Banking Control Law, the provisions of Regulations for Companies in the Kingdom of Saudi Arabia

and the Bank’s Articles of Association.

The basis of consolidation for accounting purposes is described in note 3(a) to the Notes to the consolidated

financial statements of the Annual accounts 2014.

c) Capital transferability between legal entities

Statutory restriction

SHB is required to transfer at least 25% of its net profit to statutory reserves before declaration of any dividend

for the year until the amount of statutory reserves equals the paid up capital of the bank.

Regulatory prescription

SAMA has prescribed a minimum 8% Capital adequacy ratio which is in line with Basel III requirements.

2. Capital structure

The Group is well capitalised with a Tier 1 capital ratio of 11.2 percent (2013:11.8 percent) and a total capital

ratio of 15.9 percent (2013: 18.3 percent).

For regulatory purposes, capital is categorised into two main classes. These are Tier 1 and Tier 2, which are

described below.

Tier 1 capital

Tier 1 capital consists of ordinary share capital, statutory reserves, general reserves, retained earnings and fair

value reserves.

Page | 4

The ordinary share capital is the authorised, issued and fully paid up share capital of the bank, which consists

of 476.28 million shares of SAR 10 each (2013: 396.90 million shares of SAR 10 each). The local and foreign

ownership structure of the Group’s share capital has remained unchanged during 2014. It is as follows:

Saudi Shareholders 60%

ABN AMRO Bank N.V (The Netherlands) 40%

Tier 2 capital

Tier 2 capital comprises the following:

a) Reserves. Reserves included under Tier 2 comprise balances that are available to meet unidentified

impairments. These reserves are considered as Tier 2 capital up to a maximum of 1.25 per cent of the

total risk-weighted assets as at December 31, 2014.

The Reserves also includes the staff share plan reserve elaborated in note 38 to the annual financial

statements for the year ended 31 December 2014.

b) Subordinated debt, which includes the following debt securities:

(i) SAR 2,500 million unsecured subordinated Tier II Sukuk, issued by the Group on 12 December

20123 and due in 2023. The Group may at its option, but subject to the prior written approval of

SAMA redeem these Sukuk at their redemption amount in December 2018 or in the event of

certain changes affecting the taxation and regulatory capital treatment of the Sukuk. The

commission rate paid on the above averaged 6 months SIBOR plus 155 basis points.

(ii) SAR 1,400 million unsecured subordinated Tier II Sukuk, issued by the Group on 26 November

2012 and due in 2019. The Group may at its option, but subject to the prior written approval of

SAMA redeem these Sukuk at their redemption amount in November 2017 or in the event of

certain changes affecting the taxation and regulatory capital treatment of the Sukuk. The

commission rate paid on the above averaged 6 months SIBOR plus 115 basis points.

(iii) SAR 725 million unsecured subordinated Mudaraba Certificates issued by the Group on 30

December 2009, due in 2019, through public offer, with an option to call at the end of five years

(2014). The Group exercised the option of early redemption of these certificates at their

redemption amount in December 2014. The commission rate paid on the above averaged 6

months SIBOR plus 190 basis points. All the required approvals from regulatory authorities were

obtained for the purpose of redemptions.

These borrowings are of initial maturity of not less than 5 years and are progressively discounted as

per the SAMA guidelines, based on their residual maturity. The total amount of subordinated debts

that can be considered for tier 2 cannot exceed 50% of tier 1.

The Group has not defaulted on any principal or commission repayments and there has been no breach

to any of these liabilities during 2014 or 2013.

Page | 5

The following tables provided below shows the capital structure of the Group.

All figures are in SAR'000

Balance sheet in

Published financial

statements

Adjustment of

banking associates /

other entities (*)

Under regulatory

scope of

consolidation

( C ) ( D ) ( E )

Assets

Cash and balances at central banks 9,523,463 - 9,523,463

Due from banks and other financial institutions 538,789 - 538,789

Investments, net 18,783,967 - 18,783,967

Loans and advances, net 65,147,828 - 65,147,828

Debt securities - - -

Trading assets - - -

Investment in associates 12,793 - 12,793

Derivatives - - -

Goodwill - - -

Other intangible assets - - -

Property and equipment, net 526,388 - 526,388

Other assets 2,085,990 - 2,085,990

Total assets 96,619,218 - 96,619,218

Liabilities

Due to Banks and other financial institutions 3,054,640 - 3,054,640

Items in the course of collection due to other

banks- - -

Customer deposits 76,813,865 - 76,813,865

Trading liabilities - - -

Debt securities in issue 3,900,000 - 3,900,000

Derivatives - - -

Retirement benefit liabilities - - -

Taxation liabilities - - -

Accruals and deferred income - - -

Borrowings - - -

Other liabilities 2,108,831 - 2,108,831

Subtotal 85,877,336 - 85,877,336

Paid up share capital 4,762,800 - 4,762,800

Statutory reserves 3,536,355 - 3,536,355

Other reserves 161,697 - 161,697

Retained earnings 1,661,866 - 1,661,866

Minority Interest - - -

Proposed dividends 619,164 - 619,164

Total liabilities and equity 96,619,218 - 96,619,218

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Balance sheet - Step 1 (Table 2(b))

Page | 6

All figures are in SAR'000

Balance sheet in

Published financial

statements

Adjustment of banking

associates / other

entities

Under regulatory

scope of

consolidation Reference

( C ) ( D ) ( E )

Assets

Cash and balances at central banks 9,523,463 - 9,523,463

Due from banks and other financial institutions 538,789 - 538,789

Investments, net 18,783,967 - 18,783,967

Loans and advances, net 65,147,828 - 65,147,828

of which Collective provisions 523,028 - 523,028 A

Debt securities - - -

Equity shares - - -

Investment in associates 12,793 - 12,793

Derivatives - - -

Goodwill - - -

Other intangible assets - - -

Property and equipment, net 526,388 - 526,388

Other assets 2,085,990 - 2,085,990

Total assets 96,619,218 - 96,619,218

Liabilities

Due to Banks and other financial institutions 3,054,640 - 3,054,640

Items in the course of collection due to other

banks- - -

Customer deposits 76,813,865 - 76,813,865

Trading liabilities - - -

Debt securities in issue 3,900,000 - 3,900,000

of which Tier 2 capital instruments 3,900,000 - 3,900,000 B

Derivatives - - -

Retirement benefit liabilities - - -

Taxation liabilities - - -

Accruals and deferred income - - -

Borrowings - - -

Other liabilities 2,108,831 - 2,108,831

Subtotal 85,877,336 - 85,877,336

Paid up share capital 4,762,800 - 4,762,800

of which amount eligible for CET1 4,762,800 4,762,800 H

of which amount eligible for AT1 - - I

Statutory reserves 3,536,355 - 3,536,355

Other reserves 161,697 - 161,697

Retained earnings 1,661,866 - 1,661,866

Minority Interest - - -

Proposed dividends 619,164 - 619,164

Total liabilities and equity 96,619,218 - 96,619,218

Note: Items A B, H, I have been mapped as an example to Table 2d.

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Balance sheet - Step 2 (Table 2(c))

Page | 7

Components1

of regulatory

capital

reported by the

bank

Amounts1

subject to

Pre -

Basel III

treatment

Source based

on reference

numbers / letters

of the balance

sheet under the

regulatory scope

of consolidation

from step 2

Common Equity Tier 1 capital: Instruments and reserves

1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies)

plus related stock surplus 4,762,800

H

2 Retained earnings 1,661,866

3 Accumulated other comprehensive income (and other reserves) 3,666,355

4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock

companies) -

5 Common share capital isued by subsidiaries and held by third parties (amount allowed in group

CET1) -

-

6 Common Equity Tier 1 capital before regulatory adjustments 10,091,021

Common Equity Tier 1 capital: Regulatory adjustments

7 Prudential valuation adjustments - -

8 Goodwill (net of related tax liability) - -

9 Other intangibles other than mortgage-servicing rights (net of related tax liability) - -

10 Deferred tax assets that rely on future profitability excluding those arising from temporary

differences (net of related tax liability) -

-

11 Cash-flow hedge reserve / AFS reserve 3,564 -

12 Shortfall of provisions to expected losses - -

13 Securitisation gain on sale (as set out in paragraph 562 of Basel II framework) - -

14 Gains and losses due to changes in own credit risk on fair valued liabilities - -

15 Defined-benefit pension fund net assets - -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) - -

17 Reciprocal cross-holdings in common equity - -

18 Investments in the capital of banking, financial and insurance entities that are outside the scope of

regulatory consolidation, net of eligible short positions, where the bank does not own more than

10% of the issued share capital (amount above 10% threshold)

-

-

19 Significant investments in the common stock of banking, financial and insurance entities that are

outside the scope of regulatory consolidation, net of eligible short positions (amount above 10%

threshold)

- (6,397)

20 Mortgage servicing rights (amount above 10% threshold) - -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of

related tax liability) - -

22 Amount exceeding the 15% threshold - -

23 of which: significant investments in the common stock of financials - -

24 of which: mortgage servicing rights - -

25 of which: deferred tax assets arising from temporary differences - -

26 National specific regulatory adjustments - -

REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF

AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -

OF WHICH: [INSERT NAME OF ADJUSTMENT] -

OF WHICH:… -

27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and

Tier 2 to cover deductions -

28 Total regulatory adjustments to Common equity Tier 1 3,564

29 Common Equity Tier 1 capital (CET1) 10,094,585

Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus -

31 of which: classified as equity under applicable accounting standards -

32 of which: classified as liabilities under applicable accounting standards -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 -

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries

and held by third parties (amount allowed in group AT1) -

35 of which: instruments issued by subsidiaries subject to phase out -

36 Additional Tier 1 capital before regulatory adjustments -

Additional Tier 1 capital: regulatory adjustments -

37 Investments in own Additional Tier 1 instruments - -

38 Reciprocal cross-holdings in Additional Tier 1 instruments - -

39 Investments in the capital of banking, financial and insurance entities that are outside the scope of

regulatory consolidation, net of eligible short positions, where the bank does not own more than

10% of the issued common share capital of the entity (amount above 10% threshold) - -

40 Significant investments in the capital of banking, financial and insurance entities that are outside

the scope of regulatory consolidation (net of eligible short positions) - -

41 National specific regulatory adjustments -

REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN RESPECT OF AMOUNTS

SUBJECT TO PRE-BASEL III TREATMENT -

OF WHICH: [INSERT NAME OF ADJUSTMENT] -

OF WHICH: … -

42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions-

43 Total regulatory adjustments to Additional Tier 1 capital-

44 Additional Tier 1 capital (AT1)-

45 Tier 1 capital (T1 = CET1 + AT1) 10,094,585

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Common template (transition) - Step 3 (Table 2(d)) i

(From January 2013 to 2018 identical to post 2018) With amount subject to Pre- Basel III TreatmentAll figures are in SAR'000

Page | 8

Components1

of regulatory

capital

reported by the

bank

Amounts1

subject to

Pre -

Basel III

treatment

Source based on

reference

numbers / letters

of the balance

sheet under the

regulatory scope

of consolidation

from step 2

Tier 2 capital: instruments and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus 3,620,000 B

47 Directly issued capital instruments subject to phase out from Tier 2 -

48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by

subsidiaries and held by third parties (amount allowed in group Tier 2) -

49 of which: instruments issued by subsidiaries subject to phase out -

50 Provisions 523,028 A

51 Tier 2 capital before regulatory adjustments 4,143,028

Tier 2 capital: regulatory adjustments

52 Investments in own Tier 2 instruments -

53 Reciprocal cross-holdings in Tier 2 instruments -

54 Investments in the capital of banking, financial and insurance entities that are outside the scope of

regulatory consolidation, net of eligible short positions, where the bank does not own more than

10% of the issued common share capital of the entity (amount above the 10% threshold)

-

55 Significant investments in the capital banking, financial and insurance entities that are outside the

scope of regulatory consolidation (net of eligible short positions) - (6,397)

56 National specific regulatory adjustments 28,132

REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO

PRE-BASEL III TREATMENT -

OF WHICH: [Staff Share Plan Reserve] 28,132

OF WHICH: … -

57 Total regulatory adjustments to Tier 2 capital 28,132

58 Tier 2 capital (T2) 4,171,160

59 Total capital (TC = T1 + T2) 14,265,745

RISK WEIGHTED ASSETS IN REPECT OF AMOUNTS SUBJECT TO PRE-BASEL III

TREATMENT -

OF WHICH: [INSERT NAME OF ADJUSTMENT] -

OF WHICH: … -

60 Total risk weighted assets89,998,940

Capital ratios

61 Common Equity Tier 1 (as a percentage of risk weighted assets) 11.22%

62 Tier 1 (as a percentage of risk weighted assets) 11.22%

63 Total capital (as a percentage of risk weighted assets) 15.85%

64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer

plus countercyclical buffer requirements plus G-SIB buffer requirement expressed as a percentage

of risk weighted assets)n/a

65 of which: capital conservation buffer requirement n/a

66 of which: bank specific countercyclical buffer requirement n/a

67 of which: G-SIB buffer requirement n/a

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) 11.22%

National minima (if different from Basel 3)

69 National Common Equity Tier 1 minimum ratio (if different from Basel 3 minimum) n/a

70 National Tier 1 minimum ratio (if different from Basel 3 minimum) n/a

71 National total capital minimum ratio (if different from Basel 3 minimum) n/a

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financials

73 Significant investments in the common stock of financials

74 Mortgage servicing rights (net of related tax liability)

75 Deferred tax assets arising from temporary differences (net of related tax liability)

Applicable caps on the inclusion of provisions in Tier 2

76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach

(prior to application of cap) 523,028

77 Cap on inclusion of provisions in Tier 2 under standardised approach 1,124,987

78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based

approach (prior to application of cap) n/a

79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approachn/a

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan

2018 and 1 Jan 2022)

80 Current cap on CET1 instruments subject to phase out arrangements

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities)

82 Current cap on AT1 instruments subject to phase out arrangements

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)

84 Current cap on T2 instruments subject to phase out arrangements

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Common template (transition) - Step 3 (Table 2(d)) ii

(From January 2013 to 2018 identical to post 2018) With amount subject to Pre- Basel III TreatmentAll figures are in SAR'000

Page | 9

1 Issuer Saudi Hollandi Bank

2 Unique identifier (eg CUSPIN, ISIN or Bloomberg identifier for private placement) SA135VKOGAJ2

3 Governing law(s) of the instrumentPrivate Placement under

CMA regulations

Regulatory treatment

4 Transitional Basel III rules Yes

5 Post-transitional Basel III rules N/A

6 Eligible at solo/lgroup/group&solo GROUP

7 Instrument type Sukuk

8Amount recognised in regulatory capital (Currency in mil, as of most recent

reporting date)Saudi Riyals 1,400 million

9 Par value of instrument Saudi Riyals 1 million

10 Accounting classification Subordinated debt

11 Original date of issuance November 26, 2012

12 Perpetual or dated Dated

13 Original maturity date November 30, 2019

14 Issuer call subject to prior supervisory approval Yes

15 Option call date, contingent call dates and redemption amount November 26, 2017

16 Subsequent call dates if applicable NIL

Coupons / dividends

17 Fixed or Floating dividend/coupon Floating

18 Coupon rate and any related index6 months SIBOR Plus 115

basis points

19 Existence of a dividend stopper NO

20 Fully discretionary, partially discretionary or mandatory Mandatory

21 Existence of step up or other incentive to redeem NO

22 Non cumulative or cumulative N/A

23 Convertible or non-convertible Non-convertible

24 If convertible, conversion trigger (s) N/A

25 If convertible, fully or partially N/A

26 If convertible, conversion rate N/A

27 If convertible, mandatory or optional conversion N/A

28 If convertible, specify instrument type convertible into N/A

29 If convertible, specify issuer of instrument it converts into N/A

30 Write-down feature NO

31 If write-down, write-down trigger (s) N/A

32 If write-down, full or partial N/A

33 If write-down, permanent or temporary N/A

34 If temporary writedown, description of the write-up mechansim N/A

35Position in subordination hierarchy in liquidation (specify instrument type

immediately senior to instrument)

Junior in right of payments

to "claims of depositor's or

any other unsubordinated

payment obligations"

36 Non-compliant transitioned features NO

37 If yes, specify non-compliant features N/A

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Main features template of regulatory capital instruments - (Table 2(e)) - 1

Page | 10

1 Issuer Saudi Hollandi Bank

2 Unique identifier (eg CUSPIN, ISIN or Bloomberg identifier for private placement) SA13EFK0GBJ7

3 Governing law(s) of the instrumentPrivate Placement under

CMA regulations

Regulatory treatment

4 Transitional Basel III rules N/A

5 Post-transitional Basel III rules Yes

6 Eligible at solo/lgroup/group&solo GROUP

7 Instrument type Sukuk

8Amount recognised in regulatory capital (Currency in mil, as of most recent

reporting date)Saudi Riyals 2,500 million

9 Par value of instrument Saudi Riyals 1 million

10 Accounting classification Subordinated debt

11 Original date of issuance December 12, 2013

12 Perpetual or dated Dated

13 Original maturity date December 12, 2023

14 Issuer call subject to prior supervisory approval Yes

15 Option call date, contingent call dates and redemption amount December 12, 2018

16 Subsequent call dates if applicable NIL

Coupons / dividends

17 Fixed or Floating dividend/coupon Floating

18 Coupon rate and any related index6 months SIBOR Plus 155

basis points

19 Existence of a dividend stopper NO

20 Fully discretionary, partially discretionary or mandatory Mandatory

21 Existence of step up or other incentive to redeem NO

22 Non cumulative or cumulative N/A

23 Convertible or non-convertible Non-convertible

24 If convertible, conversion trigger (s) N/A

25 If convertible, fully or partially N/A

26 If convertible, conversion rate N/A

27 If convertible, mandatory or optional conversion N/A

28 If convertible, specify instrument type convertible into N/A

29 If convertible, specify issuer of instrument it converts into N/A

30 Write-down feature Yes

31 If write-down, write-down trigger (s) To be determined by SAMA

32 If write-down, full or partial To be determined by SAMA

33 If write-down, permanent or temporary To be determined by SAMA

34 If temporary writedown, description of the write-up mechansim To be determined by SAMA

35Position in subordination hierarchy in liquidation (specify instrument type

immediately senior to instrument)

Junior in right of payments to

"claims of depositor's or any

other unsubordinated

payment obligations"

36 Non-compliant transitioned features NO

37 If yes, specify non-compliant features N/A

TABLE 2: CAPITAL STRUCTURE - DECEMBER 2014

Main features template of regulatory capital instruments - (Table 2(e)) - 2

Page | 11

3. Capital adequacy

SHB determines an adequate level of capital to cover the risks it is exposed to and to support its current and

forecast growth. Within SHB, capital adequacy is assessed in the ICAAP. The ICAAP is required as part of

the Basel III Pillar II capital adequacy regime. It aligns capital levels to all risks (Pillar 1 & Pillar 2) that the

Group is exposed to, and outlines processes by which the Group identifies, measures, monitors and manages

risks, thereby ensuring that the Group’s capitalization is appropriate.

Capital Planning and Targets

The ICAAP describes the Group’s business strategy, its forecasts for risk weighted assets, its appetite and its

assessment of the specific risks it is exposed to, how it intends to mitigate those risks and the capital it allocates

to these risks. As such, the ICAAP is a crucial element of the Group’s strategic decision making, and the

strategy is continuously aligned with the ICAAP.

The ICAAP contains, in detail the following elements:

a) The risks the Group is exposed to and how it measures, monitors and manages those risks;

b) A calculation of internal capital requirements (including Pillar 1 and Pillar 2 risks) in light of the

business plans and the risks the Group is exposed to;

c) A calculation of the capital generated internally or externally and the assessment of the adequacy of

the Group's capital and buffers vis-à-vis the capital requirements; and

d) A stress test of the Group's capital buffer.

In addition to the annual ICAAP review, the bank has a capital management plan, updated monthly and

monitored closely.

The following sections cover the Pillar 1 risks, which the Group is exposed to and the capital requirements for

the same.

a) Risk Exposure and Risk Assessment under Pillar 1

The following table details the types of exposures in each asset class.

Basel Asset Class Typical Types of Exposure

Corporate

Individually rated, un-rated and managed exposures not covered under other categories - mainly

lending and off-balance sheet facilities provided to larger companies, partnerships and other legal entities

Sovereign Exposures to sovereigns and central banks. Includes direct exposures e.g. bond holdings

Bank Exposures to non-Group bank counterparties. Includes bond holdings and deposits with other banks, trade finance exposures, guarantees provided by other banks and derivatives

Residential Mortgage Retail exposures secured by residential properties

Qualifying Revolving Retail Retail managed consumer credit card exposures

Other Retail Retail managed exposures other than mortgage and qualifying revolving - includes personal loans,

consumer and small business leasing, retail small business lending

Equity Holdings of third party equities where not consolidated or deducted from capital

Other Assets Mainly fixed assets and prepayments

The Risk assessment process is elaborated under disclosure 4.

The Group applies the standardised approach for calculation of credit risk under Pillar 1.

Page | 12

b) Credit valuation adjustment risk

Basel III introduces a new regulatory capital charge designed to capture the risk associated with potential

mark-to-market losses associated with the deterioration in the creditworthiness of a counterparty (Credit Value

Adjustment (CVA)). Under Basel III, banks are required to calculate capital charges for CVA under either the

Standardized CVA approach or the Advanced CVA approach (ACVA). SHB follows Standardized approach

for calculation of CVA capital charge.

The regulatory CVA capital charge applies to all counterparty exposures arising from over-the-counter (OTC)

derivatives, excluding those with central counterparties (CCP). Exposures arising from Securities Financing

Transactions (SFT) are not to be included in the CVA charge unless they could give rise to a material loss.

The capital requirement for CVA is reported as part of Table 3, which is provided below.

The following table shows the amount of Risk weighted exposures by portfolio and the capital requirements

for the same.

The Group applies the Standardised approach to calculate the capital charge to cover market risk, which uses a

“building-block” approach. The capital charge for each risk category is determined separately. Within the

commission rate and equity position risk categories, separate capital charges for specific risk and the general

market risk arising from debt and equity positions are calculated. The following table shows the capital

requirements for various risks.

Portfolios Amount of

exposures

Capital

requirements

Sovereigns and central banks: 24,451,776 -

SAMA and Saudi Government 24,241,018 -

Others 210,758 -

Multilateral Development Banks (MDBs) - -

Public Sector Entities (PSEs) - -

Banks and securities firms 3,921,040 135,386

Corporates 68,915,686 5,469,305

Retail non-mortgages 6,923,276 434,916

Mortgages 6,406,608 512,529

Residential 6,406,608 512,529

Commercial - -

Securitized assets - -

Equity 378,664 31,829

Others 3,118,985 204,738

Credit Value Adjustment 43,232

Total 114,116,034 6,831,935

TABLE 3: CAPITAL ADEQUACY - DECEMBER 2014

Amount of Exposures Subject To Standardized Approach of Credit Risk and related Capital

Requirements (TABLE 3, (b))

Page | 13

TABLE 3: CAPITAL ADEQUACY – DECEMBER 2014 Capital Requirements for Market Risk (822, Table 3, (d))

(Figures in SAR 000's)

Particulars Interest rate

risk

Equity

position risk

Foreign

exchange

risk

Commodity

risk Total

Standardised approach

11,770 - 32,909 - 44,680

The Standardised Approach for operational risk capital calculation applies a beta to the average income that

was achieved for each of the Group’s business lines in the previous three years. The following table shows the

capital requirements for operational risks.

Capital Requirements for Operational Risk (Table 3, (e))

(Figures in SAR 000's)

Particulars Capital requirements

Standardised approach

323,303

Total 323,303

Capital Adequacy Ratios (TABLE 3,(f))

Particulars Total capital

ratio

Tier 1

capital ratio

Top consolidated level

15.9% 11.2%

4. Credit Risk

Credit risk is the risk of financial loss from the failure of a customer to fully honour the terms of its contract

with the Bank. Losses can arise from:

Funded lending: i.e. providing loans, overdrafts, credit cards;

Non-funded products: including contingent products such as Trade Finance facilities and FX and

other Treasury products.

Credit risk responsibility lies with the Board. The Board has delegated certain authority to the HOCC to

approve credit limits for particular obligors and to oversee the credit portfolio.

The granting of credit to customers is a core business of SHB and accounts for a major portion of the Bank's

balance sheet and profitability and hence the major contributor to the Bank’s risk assets.

Credit policies

As part of its overall Risk Governance Framework, the Bank maintains a Credit Policy and Procedures

Manual. This is subject to annual review, endorsed by HOCC and approved by the Board.

Concentration risk

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities or

activities in the same geographic region, or have similar economic features that would cause their ability to

meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments

affecting a particular industry or geographical location.

Page | 14

The Bank seeks to manage its credit risk exposure through the diversification of lending activities to ensure that

there is no undue concentration of risks with individuals or groups of customers in specific locations or

businesses.

Credit monitoring

Credit limits are monitored by the business and control functions. In addition, regular credit portfolio reports

are prepared and presented to the Board covering the corporate, retail and financial institutions portfolios.

Credit risk exposures

The following tables detail the Group’s standardised credit risks by exposure class, geographic area, industry

sector and residual maturity band.

* Quarterly averages for the year 2014.

Portfolios Total gross credit

risk exposure

Average gross credit

risk exposure over

the period

Sovereigns and central banks: 24,451,776 22,161,529

SAMA and Saudi Government 24,241,018 21,846,327

Others 210,758 315,202

Multilateral Development Banks (MDBs) - 67,673

Public Sector Entities (PSEs) - -

Banks and securities firms 3,921,040 4,691,937

Corporates 68,915,686 65,722,423

Retail non-mortgages 6,923,276 6,766,935

Mortgages 6,406,608 5,298,364

Residential 6,406,608 5,298,364

Commercial - -

Securitized assets - -

Equity 378,664 353,696

Others 3,118,985 2,563,415

Total 114,116,034 107,625,972

TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES

- DECEMBER 2014Credit Risk Exposure (Table 4, (b))

Page | 15

Saudi Arabia Other GCC &

Middle East

Europe North

America

South East

Asia

Others

countries

Total

Sovereigns and central banks: 24,241,018 210,758 - - - - 24,451,776

SAMA and Saudi Government 24,241,018 - - - - - 24,241,018

Others - 210,758 - - - - 210,758

Multilateral Development Banks (MDBs) - - - - - - -

Public Sector Entities (PSEs) - - - - - - -

Banks and securities firms 1,094,315 488,859 1,915,978 91,726 - 330,163 3,921,040

Corporates 68,361,643 307,854 14,419 3,106 - 228,665 68,915,686

Retail non-mortgages 6,923,276 - - - - - 6,923,276

Mortgages 6,406,608 - - - - - 6,406,608

Residential 6,406,608 - - - - - 6,406,608

Commercial - - - - - - -

Securitized assets - - - - - - -

Equity 378,664 - - - - - 378,664

Others 3,118,985 - - - - - 3,118,985

Total 110,524,507 1,007,471 1,930,397 94,831 - 558,828 114,116,034

TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES - DECEMBER 2014Geographic Breakdown (Table 4, (c))

Portfolios Geographic area

Page | 16

Industry Sector Breakdown (Table 4, (d)) (Figures in SAR 000's)

Portfolios

Industry sector

Govt

and quasi

govt.

Banks and

other

financial

institutions

Agricultur

e and

fishing

Manufacturi

ng

Mining

and

quarrying

Electricity,

water, gas

and health

services

Building

and

construction

Commerce

Transport

ation and

communic

ation

Services

Consumer

loans and

credit

cards

Others Total

Sovereigns and central

banks: 24,451,776 - - - - - - - - - - - 24,451,776

SAMA & Saudi Government

24,241,018 - - - - - - - - - - - 24,241,018

Others 210,758 - - - - - - - - - - - 210,758

Multilateral

Development Banks

(MDBs)

- - - - - - - - - - - - -

Public Sector Entities (PSEs)

- - - - - - - - - - - - -

Banks and sec firms - 3,921,040 - - - - - - - - - - 3,921,040

Corporates 231 2,550,514 1,165,494 13,412,990 342,803 3,292,548 18,552,558 18,553,684 1,079,813 7,221,249 - 2,743,802 68,915,686

Retail non-mortgages - - - - - - - - - - 6,923,276 - 6,923,276

Mortgages - - - - - - - - - - 6,406,608 - 6,406,608

Residential - - - - - - - - - - 6,406,608 - 6,406,608

Commercial - - - - - - - - - - - - -

Securitized assets - - - - - - - - - - - - -

Equity - - - - - - - - - - - 378,664 378,664

Others - - - - - - - - - - - 3,118,985 3,118,985

Total 24,452,007 6,471,554 1,165,494 13,412,990 342,803 3,292,548 18,552,558 18,553,684 1,079,813 7,221,249 13,329,883 6,241,451 114,116,034

Page | 17

Less than 8

days

8-30 days 30-90 days 90-180 days 180-360 days 1-3 years 3-5 years Over 5 years Total

Sovereigns and central banks: 8,706,861 1,058,151 3,978,587 2,771,500 6,209,030 285,075 94,206 1,348,365 24,451,776

SAMA and Saudi Government 8,706,861 1,001,802 3,978,587 2,771,500 6,209,030 284,150 17,088 1,272,000 24,241,018

Others - 56,350 - - - 925 77,118 76,365 210,758

Multilateral Development Banks (MDBs) - - - - - - - - -

Public Sector Entities (PSEs) - - - - - - - - -

Banks and securities firms 1,293,083 42,564 423,185 234,824 365,651 775,827 188,128 597,778 3,921,040

Corporates 5,260,195 8,151,660 9,363,760 8,043,250 5,911,594 12,684,585 11,170,403 8,330,238 68,915,686

Retail non-mortgages 1,087,749 38,272 92,019 85,520 128,898 1,323,853 3,859,354 307,610 6,923,276

Mortgages - - - - - 6,383 86,777 6,313,447 6,406,608

Residential - - - - - 6,383 86,777 6,313,447 6,406,608

Commercial - - - - - - - - -

Securitized assets - - - - - - - - -

Equity - - - - - - - 378,664 378,664

Others 1,172,237 - - - - - - 1,946,748 3,118,985

Total 17,520,124 9,290,647 13,857,551 11,135,095 12,615,173 15,075,723 15,398,869 19,222,850 114,116,034

TABLE 4 (STA): CREDIT RISK: GENERAL DISCLOSURES - DECEMBER 2014Residual Contractual Maturity Breakdown (Table 4, (e))

Portfolios Maturity breakdown

Page | 18

Impairment assessment methodology

In determining whether an impairment loss should be recorded, the Bank makes judgements as to any collateral held and

whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows.

This evidence may include observable data indicating there has been an adverse change in the payment status of borrowers in a

group. Management uses estimates based on historical loss experience for loans with credit risk characteristics and objective

evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used

for estimating both the amount and the timing of the future cash flows are reviewed regularly to reduce any differences between

loss estimates and actual loss experience.

The following tables sets out the details of impaired and defaulted loans and the provisions the Group is carrying as at the

reporting date 31 December 2014.

Impaired Loans, Past Due Loans and Allowances (Table 4, (f)) (Figures in SAR 000's)

Industry sector Impaired

loans Defaulted

Ageing of Past Due Loans (days) Specific allowances

General allowances Less

than 90 90-180 180-360

Over 360

Balance at the

beginning of the period

Charges during

the period

Charge-offs during the

period

Balance at the end of

the period

Government and

quasi government - - - - - - - - - - -

Banks and other

financial institutions - - - - - - - - - - -

Agriculture and fishing

- - - - - - - - - - -

Manufacturing 39,372 35,524 15,458 20,065 - - 99,701 (7,669) (52,660) 39,372 -

Mining and quarrying - - - - - - - - - - -

Electricity, water, gas

and health services 33,677 3,974 3,974 - - - 8,300 33,677 (8,300) 33,677 -

Building and

construction 349,851 86,555 86,555 - - - 231,321 118,530 - 349,851 -

Commerce 298,674 63,134 63,134 - - - 275,291 71,590 (48,207) 298,674 -

Transportation and communication

- 225 225 - - - 7,800 (7,800) - - -

Services 19,060 13,014 13,014 - - - 2,495 16,565 - 19,060 -

Consumer loans and credit cards

41,990 311,948 311,948 - - - 35,930 38,964 (45,503) 29,391 116,143

Others 58,998 10,137 10,137 - - - 68,768 21,679 (31,449) 58,998 406,885

Total 841,622 524,510 504,445 20,065 - - 729,606 285,536 (186,119) 829,023 523,028

The geographical distribution of impaired loans, past due loans and allowances as at 31 December 2014 are provided

hereunder:

Impaired Loans, Past Due Loans And Allowances (Table 4, (g)) (Figures in SAR 000's)

Geographic area Impaired loans

Aging of Past Due Loans (days) Specific

allowances

General

allowances Less than

90 90-180 180-360 Over 360

Saudi Arabia 841,622 504,445 20,065 - - 829,023 523,028

Total 841,622 504,445 20,065 - - 829,023 523,028

Page | 19

The following table sets out the movements in the Group’s total individual and portfolio impairment provisions against loans

and advances.

Reconciliation Of Changes In The Allowances For Loan Impairment (Table 4, (h))

(Figures in SAR 000's)

Particulars Specific

allowances

General

allowances

Balance, beginning of the year

729,606 462,957

Charge-offs taken against the allowances during the period

(186,119) -

Amounts set aside (or reversed) during the period

285,536

60,071

Transfers between allowances - -

Balance, end of the year 829,023 523,028

5. Standardized approach and supervisory risk weights

Qualitative disclosures

For portfolios under the standardized approach, External Credit Assessment Institutions risk assessments are used by SHB as

part of the determination of risk weightings:

Ratings for banks have been sourced from Standard and Poor’s Ratings Group, the Fitch Group and Moody’s.

Credit ratings of all exposures are individually determined from the above credit rating agencies and mapped to the exposures

assigning a risk weight according to the supervisory tables.

Where the obligors have not yet obtained such a rating, the exposure is taken as unrated and appropriate risk weights applied.

The Group has not adopted any of the IRB approaches.

The alignment of alphanumeric scales of each agency to risk buckets:

Alphanumeric scales:

Moody’s Standard and Poor’s Fitch

Aaa AAA AAA

Aa1 AA+ AA+

Aa2 AA AA

Aa3 AA- AA-

A1 A+ A+

A2 A A

A3 A- A-

Baa1 BBB+ BBB+

Baa2 BBB BBB

Baa3 BBB- BBB-

Ba1 BB+ BB+

Ba2 BB BB

Ba3 BB- BB-

Page | 20

B1 B+ B+

B2 B B

B3 B- B-

Caa1 CCC+ CCC+

Caa2 CCC CCC

Caa3 CCC-

Ca CC

C C

WR D

NR

Claims on sovereigns and their central banks

Credit

Assessment

AAA to

AA-

A+ to

A-

BBB+ to

BBB-

BB+ to

B-

Below B- Unrated

Risk Weight 0% 20% 50% 100% 150% 100%

Claims on Banks and Securities Firms

SAMA requires banks operating in Saudi Arabia to use Option 2 for risk-weighting claims on banks and securities firms.

Credit Assessment AAA

to AA-

A+ to

A-

BBB+

to

BBB-

BB+

to B-

Below B- Unrated

Risk Weight under Option 2 20% 50% 50% 100% 150% 50%

Risk weight for short-term claims under Option - 2 20% 20% 20% 50% 150% 20%

Multilateral Development Banks

A 0% risk weight has been applied for the MDB’s approved by SAMA.

Claims on public sector entities (PSEs)

As per Option 2.

Claims included in the regulatory non-mortgage retail portfolios

A 75% risk weight has been assigned to such exposures.

Claims on corporate

Credit Assessment AAA to

AA-

A+ to A- BBB+ to

BB-

Below

BB-

Unrated

Risk Weight 20% 50% 100% 150% 100%

Claims secured by Residential Mortgages

A 100% risk weight has been applied to such claims.

Page | 21

Claims secured by Commercial Real Estate

A 100% risk weight has been applied to such claims.

Past due loans

The unsecured portion of any loan that is past due for more than 90 days or rescheduled, net of specific provisions (including

partial write-offs), have been risk weighted as follows:

Level of Provisioning Risk weight%

Upto 20% 150

above 20% 100

Other assets

The standard risk weight for all other assets will be 100% except cash & cash equivalents which are risk weighted at 0%. Other

assets include various transmission accounts, accrued receivables, cash and cash equivalents and fixed assets.

The allocation of credit risk exposures on the basis of risk buckets are provided hereunder:

6. Credit Risk: Disclosures for portfolios subject to IRB approaches

Not Applicable

7. Credit Risk Mitigation

The Main Types of Collateral Taken by SHB

Collateral is used to mitigate credit risk, and provides an alternative source of repayment in the event an obligor cannot meet its

contractual obligations through its operating cash flow or by refinancing.

Types of collateral typically accepted by SHB include, but are not limited to:

- Cash and lien over deposits;

- Real estate security over residential, commercial, industrial or rural property;

- Charges over specific plant and equipment;

- Charges over listed shares, bonds and other securities; and

- Guarantees and pledges.

0% 20% 35% 50% 75% 100% 150%Other risk

weightsUnrated TOTAL

Sovereigns and central banks: 24,451,776 - - - - - - 24,451,776

SAMA and Saudi Government 24,241,018 - - - - - - 24,241,018

Others 210,758 - - - - - - 210,758

Multilateral Development Banks (MDBs) - - - - - - - -

Public Sector Entities (PSEs) - - - - - - - -

Banks and securities firms - 1,082,841 - 2,724,907 - 113,292 - - - 3,921,040

Corporates - 355,018 - 530,720 - 68,009,883 20,065 - - 68,915,686

Retail non-mortgages - - - - 5,947,270 976,006 - 6,923,276

Mortgages - - - - - 6,406,608 - - - 6,406,608

Residential - - - - - 6,406,608 - 6,406,608

Commercial - - - - - - - -

Securitized assets - - - - - - - -

Equity - - - - - 365,870 - 12,794 378,664

Others 569,803 - - - - 2,549,182 - - 3,118,985

TOTAL 25,021,579 1,437,859 - 3,255,626 5,947,270 78,420,841 20,065 12,794 - 114,116,034

TABLE 5 (STA): CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDIZED APPROACH - DECEMBER 2014Allocation Of Exposures To Risk Buckets (Table 5, (b))

Particulars Risk buckets

Page | 22

In some cases, such as where the customer risk profile is considered very sound, or by the nature of the product, a transaction

may not be collateralized.

The Credit Policy and Procedures Manual sets out the types of collateral acceptable to the Bank, and also governs the process

by which additional instruments and/or asset types can be considered for approval.

Besides tangible security and guarantee support as described above, credit risk is further mitigated by prudent transaction

structuring and documentation. For example, in some transactions risk can be mitigated by lending covenants, or political risk

insurance.

Policies and Processes for Collateral Valuation and Management

SHB has established policies and processes around collateral valuation and management. The concepts of legal enforceability,

certainty and accurate valuation are central to collateral management. In order to achieve legal enforceability and certainty,

SHB has standard collateral instruments, and, where possible, security interests are registered.

In order to rely on the valuation of collateral assets, SHB has developed comprehensive rules around acceptable types of

valuations (including who may value an asset), the frequency of revaluations and standard loan-to-value ratios for typical asset

types. Upon receipt of a new valuation, the information is used to reassess the adequacy of the collateral. In the case of

impaired assets, collateral valuations are considered when setting and reviewing provisions.

Credit Risk Exposure Covered By CRM (Table 7, (b) and (c))

(Figures in SAR 000's)

Portfolios

Covered by

Eligible financial

collateral

Guarantees / credit

derivatives

Corporates 453,307 -

Total 453,307 -

8. General disclosure for exposure related to counter-party credit risk

Counterparty credit risk is the risk that the Group’s counterparty in a foreign exchange, commission rate, commodity, equity or

credit derivative contract defaults prior to the maturity date of the contract and that the Group at the time has a claim on the

counterparty.

The Group calculates its counterparty credit risk under both trading and banking book exposures by assigning risk weights to

exposure types, which are as follows:

a) Securities financing transactions (e.g. reverse repo) - trading and banking book

b) Over the counter (OTC) derivatives – trading and banking book

Capital requirement is determined on above exposures based on the same methodology as credit risk and is reported separately

for risk assessment.

9. Securitisation

The Group is not involved in any securitisation deals, hence the requirement for qualitative and quantitative disclosures does

not arise.

Page | 23

10. Market Risk: Disclosure for Banks using standardized approach

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market

variables such as commission rates, foreign exchange rates, and equity prices. The Bank classifies exposures to market risk

into either trading or banking-book.

10.1 Risk identification

Since January 1, 2008, SHB, has been Basel II Standardised Approach compliant with respect to market risk reporting and

calculation of capital.

10.2 Risk measurement

The following table shows the capital requirements for various market risks as at 31 December 2014, based on the standardised

approach.

Level Of Market Risks In Terms Of Capital Requirements (Table 10, (b))

(Figures in SAR 000's)

Commission

rate risk

Equity

position

risk

Foreign

exchange

risk

Commodity

risk Total

Capital requirements 11,771 - 32,909 - 44,681

SHB uses a range of measures to manage market risk. These include a comprehensive framework of market risk limits by risk

factor and business line, ranging from specific dealer stop loss limits, to sensitivity limits such as present value of a basis point

movement of commission rates and open currency position limits as well as Value at Risk (VaR) limits. Market risk stress

testing is also carried out in order that management is aware of and able to take any action necessary to mitigate losses that

could arise from extreme scenarios.

11. Market Risk: Disclosure for banks using internal models approach (IMA) for

trading portfolios

Not applicable.

12. Operational Risk

Operational risk is defined as the risk of loss due to inadequate or failed internal processes, people and systems, or from

external events. SHB’s approach has been to adopt the Sound Practices for Operational Risk as a guideline and the

Standardized Approach for capital calculation, as defined by the Basel II framework.

12.1 Objective

Operational risks are inherent to all business activities. It is the Group’s objective to minimize the bank's exposure to such risks,

subject to cost tradeoffs. This objective is met through a framework of policies and procedures that ensure risk identification,

assessment, control and monitoring.

12.2 Governance Structure

The Operational Risk Management unit (ORM) reports to the CRO and is managed by the Head of Non-Financial Risk. ORM

is guided and directed by the ORM committee, at the request of SHB's Board of Directors.

Page | 24

12.3 Risk identification

SHB follows a ‘best practice’ methodology of risk assessment and control evaluation for the identification of inherent

operational risks. ORM manages operational risk for new or changed initiatives/products through the Operational Risk

Assessment Procedure (ORAP) and the policy for this is set out in the ORAP Policy Manual. All operating losses and issues are

recorded in the Bank's Operational Loss Database as part of the Bank's system supporting its internal control framework:

BWise GRC. Operational risks are identified and assessed using the Risk and Control Self-Assessment and Key Risk Indicator

tools

12.4 Risk Measurement

Measurement of operational risk is managed primarily through the bank's loss database and the register of deficiencies, both of

which are maintained in GRC.

13. Equities: Disclosures for banking book positions

All Equity investments are classified as “Available for sale”.

Available-for-sale investments are those intended to be held for an unspecified period of time, which may be sold in response to

needs for liquidity or changes in commission rates, exchange rates or equity prices.

Investments, which are classified as “available for sale” are subsequently measured at fair value. For an available-for-sale

investment where the fair value has not been hedged, any gain or loss arising from a change in its fair value is recognized

directly in “Other reserves” under Shareholders’ equity. On derecognition, any cumulative gain or loss previously recognized

in shareholders’ equity is included in the consolidated statement of income for the period.

Equity investments classified under available-for-sale investments whose fair value cannot be reliably measured are carried at

cost.

The following tables shows the equities investment in banking book as at 31 December 2014

Value Of Investments (Table 13, (b)) Figures in SAR 000's

Un-quoted investments Quoted investments

Value disclosed

in Financial

Statements

Fair value

Value

disclosed in

Financial

Statements

Fair value

Publicly quoted

share values (if

materially

different from

fair value)

Investments 3,438 3,438 375,226 375,226 -

Types And Nature of Investments (Table 13, (c)) (Figures in SAR 000's)

Investments Publicly traded Privately held

Banks and other financial institutions 375,226 500

Services - 2,938

Total 375,226 3,438

Gains / Losses Etc. (Table 13, (d) and (e)) (Figures in SAR 000's)

Particulars Amount

Unrealized gains (losses) included in Capital (13,986)

Total unrealized gains (losses) (13,986)

Page | 25

Capital Requirements (Table 13, (f)) (Figures in SAR 000's)

Equity grouping Capital requirements

Banks and other financial institutions 31,594

Services 235

Total 31,829

14. Commission rate risk in the Banking book

Commission rate risk in the Banking Book arises from the possibility that the changes in commission rates will affect either the

fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for

stipulated periods. The Bank monitors positions daily and uses hedging strategies to ensure maintenance of positions within the

established gap limits.

The table shown under Note 31 b (i) to the financial statements 2014, depicts the sensitivity to a reasonable possible change in

commission rates, with other variables held constant, on the Bank’s statement of income or equity. The sensitivity of the

income is the effect of the assumed changes in commission rates on the net commission income for one year, based on the

floating rate non-trading financial assets and financial liabilities held as at December 31, 2014 including the effect of hedging

instruments. The sensitivity of equity is calculated by revaluing the fixed rate available for sale financial assets, including the

effect of any associated hedges as at December 31, 2014 for the effect of assumed changes in commission rates. The sensitivity

of equity is analyzed by maturity of the asset or the hedging instrument.

Rate Shocks Change in earnings

Upward rate shocks:

SAR 391,629

USD (12,156)

Downward rate shocks:

SAR (391,629)

USD 12,156

TABLE 14: INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

- DECEMBER 2014 200bp Interest Rate Shocks for currencies with more than 5% of Assets or Liabilities

(Table 14, (b))

Page | 26

Abbreviations used:

CRM: Corporate Risk Management

CRO: Chief Risk Officer

HOCC: Head Office Credit Committee

ICAAP: Internal Capital Adequacy Assessment Plan

ORAP: Operational Risk Assessment Procedure

ORM: Operational Risk Management

RWA: Risk Weighted Assets

SAMA: Saudi Arabian Monetary Agency

SHB: Saudi Hollandi Bank

VaR: Value at risk